- Markets finally succumbed to combined concerns around the impact of rising interest rates, the war in Ukraine and spreading lockdowns in China, with most major indices posting losses in April.
- The Australian market again performed relatively better, with the ASX300 Accumulation Index declining by a modest -0.8% over the month. The risk-off move in markets saw the more defensive sectors of the market outperform.
- Looking to the current financial year, the Fund is currently targeting a 30% increase in FY22 net distribution to 20.7 CPU. Based on the unit price at the start of the year, this equates to a cash distribution yield of around 5.5% and 7.5%, including franking credits. Any surplus income will be distributed with the June distribution.
|Month (%)||Quarter (%)||FYTD (%)||1 Year (%)||3 Years (%)||Since Inception* (% p.a.)|
|Income Distribution including Franking Credits||0.60||1.90||6.30||8.30||11.30||10.10|
|Benchmark Yield* Franking Credits||0.00||2.20||4.90||5.80||5.20||5.50|
|Excess Income to Benchmark*||0.60||-0.30||1.40||2.50||6.10||4.60|
^Since inception May 2018. EIGA returns are calculated using net asset value per unit at the start and end of the specified period and do not reflect the brokerage or the bid ask spread that investors incur when buying and selling units on the ASX. Benchmark yield is calculated based on the difference between the return of the S&P/ASX300 Franking Credit Adjusted Daily Total Return Index (Tax Exempt) and return of the S&P/ASX300 Index. #Franking credits are an estimate only as tax components will only be known with certainty at the end of the financial year. Past performance is not a reliable indicator of future performance.
Have you thought about reinvesting your distributions? If you don’t rely on the cash payment of distributions every month it might be worth considering reinvesting them so your invested capital can build and grow through the DRPPlan. You can do this by logging onto your Link account or emailing [email protected] or call 1300 554 474.
EIGA returned +0.2%, including franking credits and after-fees in April, outperforming the Index by +1.0%. For the last 12 months, the Fund has delivered a return of +14.7%, outperforming the Index by +3.0%. This demonstrates the Fund’s leverage to the value rotation which has been taking place as global growth has improved and interest rates have begun to rise from their historically low levels.
While the current uncertainties may cause a short-term pause, we expect that this rotation still has a long way to run, given the macro backdrop and the high level of valuation dispersion which exists in the market. As such we continue to position the portfolio to benefit from this trend.
Graincorp (+21.6%), continued its rally, after upgrading guidance yet again. Eastern Australian agricultural markets are experiencing a near perfect storm of favourable growing conditions, high soft commodity prices and strong export demand. Conditions have been strong for the last 2 years but uncertainty stemming from the Black Sea region has driven a further spike in grain prices and strong demand for reliable Australian supplies into the global market.
Other strong performers included packaging company, Orora (+10.8%), which hosted an investor day highlighting the strong performance of its Australian glass and can manufacturing operations and the ongoing recovery in its US business. This is a very well-managed company, offering defensive earnings, with a strong balance sheet to support growth opportunities.
Ampol (+10.5%), outperformed after the NZ competition regulator approved its proposed acquisition of Z Energy. This transaction is expected to be very positive for the company, creating a Trans-Tasman leader in transport fuels and convenience retail, with significant additional scale. The company also announced its March quarter earnings, which saw very strong margins from its refining operation. The increased level of volatility and geopolitical uncertainty has highlighted the importance of maintaining a level of domestic refining capacity, with the government having moved to underwrite the profitability of the sector.
United Malt (+10.1%), also performed well, despite lowering guidance for the current financial year. While earnings are presently being impacted by a range of COVID-related supply chain and logistical disruptions, underlying demand is strong, and earnings are expected to recover strongly as these abate. Further, this company is a potential takeover target, with attractive market positions in a consolidating industry.
Insurance stocks IAG (+3.7%) and Suncorp (+3.1%) both outperformed with continuing strength in the insurance premium rate cycle and the expected benefits from higher interest rates which will boost the earnings from their investment portfolios.
Stocks which underperformed during the month included our resources holdings, which were generally lower on the back of concerns over the Chinese growth outlook, following renewed COVID lockdowns in a number of cities. We remain positive on the outlook for the resources sector as while lockdowns will impact growth in the current quarter, we expect that the Government will implement meaningful stimulus measures in the second half of the year. This is expected to support commodities demand and will come in the context of generally tight supply conditions for most commodities.
During the month, we took profits and reduced our holding in Graincorp. This has been a very strong performer, with its share price nearly doubling from our entry price. Proceeds were used to establish positions in James Hardie and Treasury Wine Estates. These are both high quality companies, which have been sold down to attractive levels and where we see significant long-term upside. At month end, stock numbers were 32 and cash was 6.3%.
In order to provide a regular income stream, the Fund pays monthly distributions. We aim to pay equal cash distributions each month, based on our estimate of the dividend income to be generated over the year. Franking credits, surplus income and any realised capital gains will then be distributed, as per usual, with the June distribution.
Despite the various uncertainties, many businesses are seeing strong operating conditions. Further, corporate balance sheets are generally strong. In particular, the banks are well-capitalised and the resources sector is largely debt free and generating very strong cash flows. This should underpin an attractive level of dividends in the year ahead. In addition, many companies are likely to undertake capital returns such as off-market buy-backs to return excess capital and franking credits to investors.
As a result, the Fund is currently targeting a 30% increase in FY22 net distribution to 20.6 CPU. At the opening unit price of $4.04, this represents a net distribution yield of 5.5% or 7.5% including franking.
On balance, we view the outlook as positive, with economies recovering as COVID recedes. Economic data continues to be strong in most regions, with very low unemployment rates. The Australian economy is performing particularly strongly and will continue to be a key beneficiary of the strength in commodity markets. However, there are a number of potentially significant changes in the global economic and political backdrop, from the return of inflation and the change in the interest rate cycle, to rising geopolitical tensions. As a result, the level of uncertainty is elevated, and a degree of caution is warranted.
This view is expressed in the portfolio through holding a combination of stocks with cyclical leverage, as well as stocks with solid defensive characteristics. Importantly, the portfolio is positively leveraged to improving growth, higher inflation, and rising interest rates. Within the cyclical part of the portfolio, this is achieved through overweight positions in the Resources, Energy and Consumer Discretionary sectors. In the defensive part of the portfolio, this is achieved through holdings in the sectors such as Telcos and Consumer Staples.
The Fund continues to offer a higher forecast gross yield than the overall market and, as always, our focus will continue to be on investing in quality companies with strong balance sheets, which are offering attractive valuations and have the ability to deliver high levels of franked dividend income to investors. Further, we believe the current very low interest rates highlight the relative attractiveness of financially-sound, high dividend-yielding equities.
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Interested in purchasing units in the fund? Contact your financial adviser or simply purchase via your online broker, and as always read the PDS for more information. This can be found here
Past performance is not a reliable indicator of future performance. Please read the PDS prior to investing. This information is general in nature and is subject to the terms and conditions outlined here.